The finance ministry has said that it is keen on pursuing the cases arising from the DRI investigation into the over-invoicing scam, but there is a view that deliberate attempts are being made to stymie the prosecution process.

Over the last four years, the Directorate of Revenue Intelligence, or DRI, which is the investigative arm of the department of revenue in the finance ministry, has levelled allegations of over-invoicing of imports of coal and electricity generation equipment against at least forty of India’s biggest energy companies. The total amount involved in the scandal is an estimated Rs 50,000 crore, or more than eight billion dollars at the current exchange rate. Of this amount, around Rs 30,000 crore is on account of the over-invoicing of coal imported mainly from Indonesia. The remaining Rs 20,000 crore relates to allegations of over-invoicing of power machinery imported largely from China. The higher costs were passed on to consumers, who had to pay more for electricity.

The cases arising out of the DRI’s findings of these manipulated invoices—the undue gains from which were allegedly laundered by persons working with a host of government and private companies—seem to be heading towards a legal logjam. Government organisations, including the National Thermal Power Corporation and various state electricity boards, are involved in the alleged over-invoicing scam, along with some of India’s biggest private companies, including those in the Adani, Essar and Anil Ambani conglomerates. In a case before the DRI’s appellate tribunal, which concerns a private company called Knowledge Infrastructure Systems Private Limited, or KISPL, the investigative agency has raised doubts about the integrity of a member of the tribunal adjudicating the case. The case is crucial because it could set a precedent for other cases arising from the DRI’s investigation. As claims of corruption and favouritism emerge, the question is whether the finance ministry is diligently and expeditiously pursuing these cases, which involve corporate entities headed by politically influential tycoons and powerful technocrats. The ministry has said that it is keen on pursuing these cases, but there is a view that deliberate attempts are being made to stymie the prosecution process.

The DRI investigation alleged that 40 major companies, including Knowledge Infrastructure Systems Private Limited, had inflated the value of coal imported from Indonesia for power generation, resulting in illicit benefits of Rs 30,000 crore. The value and grade of the imported coal was allegedly misrepresented to have a higher value, leading to the cost of the coal being wrongfully increased before the regulatory authorities, which, in turn, resulted in consumers having to pay more for electricity. The DRI investigation further claimed that the illegal gains were then laundered through shell companies in tax havens outside India.

In proceedings based on the investigation, KVS Singh, an adjudicating authority of the DRI in Mumbai, has passed orders in cases relating to three companies. On 22 August last year, Singh cleared two companies, both part of the Adani Group, of charges of over-invoicing imported power-plant equipment worth Rs 3,974 crore. The investigating agency reportedly filed an appeal against the decision on 28 November, before the Customs, Excise and Service Tax Appellate Tribunal—the appellate body for the DRI’s adjudicating authority—in which it argued that the order suffers from “total non-application of mind or recklessness.”

Singh’s order appeared to contradict an earlier order that he passed on 23 December 2016, which concerned allegations against KISPL. In this order, he had accepted the DRI’s charges of over-valuation of coal imports from Indonesia and imposed a penalty of Rs 17.50 crore on the company. Singh also imposed a penalty of Rs 1.25 crore on Rahul Bhandare, the managing director of the company, and another of Rs 25 lakh on Vipin Mahajan, a former employee of the public-sector National Thermal Power Corporation who is currently a director of the company. In both cases—the one against KISPL and the one against the two companies in the Adani Group—a virtually identical modus operandi was apparently deployed for the over-invoicing and laundering process.

KISPL, too, has appealed before the CESTAT against Singh’s order—this appeal is effectively a test case of the DRI’s investigations, and it appears to be headed in a direction that could result in a major setback for the revenue authorities of the central government. Benches of the CESTAT are presided over by judicial members with legal expertise and technical members with prior experience in the Indian Revenue Service. In the KISPL appeal, a series of procedural irregularities have raised doubts about the integrity of the technical member hearing the case. The tribunal’s decision could have a lasting impact because this is the first in a series of cases expected to arise out of the four-year-long ongoing investigation by the DRI.

During the course of the appeal, the DRI also filed an application through an affidavit before Justice Satish Chandra—the president of CESTAT, who also heads the tribunal and sits at the bench in New Delhi—seeking that CJ Mathew, the technical member on the bench hearing the KISPL case, recuse himself from the case. The agency claimed in the application, a copy of which is in my possession, that Mathew’s conduct “has been far from fair and impartial.” A senior official in the DRI, speaking on the condition of anonymity, told me that the case has “almost been pulled out from the jaws of victory in a consistently unethical manner, while some in the top brass of the DRI seem to have been reduced to becoming helpless bystanders.”

With the order against KISPL now hanging in the balance before a CESTAT bench, an adverse ruling by the tribunal would set a precedent that could absolve the larger companies, both government-owned and those in the private sector, of the charges of fleecing the exchequer, and ultimately, the public. A scrutiny of the developments in the case suggests that the ground is being prepared for such a denouement, which would, in effect, be an overturning of the DRI’s order by the CESTAT bench. A top bureaucrat in New Delhi’s North Block, where the finance ministry is headquartered, told me off-the-record that some in his ministry had become mute spectators as attempts are being made to violate several judicial principles and procedures. A senior official of the DRI, however, stated that the revenue authorities were serious about pursuing this and other similar cases.

It is important to understand the background of the company at the centre of this controversy. KISPL is a Delhi-based company controlled by its chairman and managing director, Rahul Bhandare. His father, Murlidhar Chandrakant Bhandare, was a well-known lawyer who was a three-term member of the Rajya Sabha (between 1980 and 1994) from the Congress party, and a former governor of Odisha (from 2007 till 2013). His mother, Sunanda Bhandare, was a renowned judge of the Delhi High Court.

On 31 August 2016, the DRI issued a 41-page show-cause notice to KISPL, Rahul Bhandare and the KISPL director Vipin Mahajan. According to the DRI’s detailed investigations laid out in the notice, KISPL imported steam coal through intermediary firms based in Hong Kong and Singapore. The coal was shipped from Indonesian ports, whereas KISPL submitted invoices issued by firms such as Knowledge International Strategy Systems Pte, Singapore and Springs Trader Ltd, Hong Kong. KISPL supplied the imported coal to thermal power stations of the Maharashtra State Power Generation Company Limited, or Mahagenco, located at Bhusawal and Chandrapur. The DRI investigation claimed that the Singapore company was a “wholly owned subsidiary” of KISPL, as its promoters held majority shares in it.

The notice further stated that the Singapore company allegedly suppressed documents showing the actual value and grade of the procured coal, and created false documents to show that it had imported higher grades of coal. The amounts generated on account of the difference in prices were routed through a shell company based in Hong Kong. The DRI alleged that coal of a lower grade was supplied to public-sector power-generation companies such as Mahagenco in Maharashtra at inflated prices in collusion with certain officers of the public-sector undertakings.

According to Singh’s order in this case, KISPL filed a petition in the Bombay High Court to quash the DRI’s show-cause notice, but the court directed the DRI’s adjudicating authority to decide the case within three months. In December that year, Singh upheld the charges and penalised the company and its directors. Thereafter, KISPL filed another petition before the Bombay High Court to quash the adjudication order. In January 2017, the court directed KISPL to file an appeal before the appropriate forum—the CESTAT—and directed the tribunal to decide on KISPL’s appeal within six months. Accordingly, the company filed an appeal before the CESTAT bench in Mumbai on 14 February.

The case was listed for its first hearing on 9 March, before a bench comprising the judicial member MV Ravindran and the technical member CJ Mathew, but the bench was reconstituted soon after.DN Panda replaced Ravindran, whereas Mathew continued in his position. On the penultimate hearing on 31 August, KISPL’s counsel sought an adjournment, which the tribunal granted. The tribunal then fixed the final hearing in the case for 12 September—nearly a month after the Bombay High Court’s six-month deadline had elapsed. According to the DRI’s application seeking Mathew’s recusal, the judicial member of the bench, Panda, was due to retire on 14 December 2017, and had “submitted a draft order for finalization” on 11 December. The application further states that Mathew “perused the Draft Order” and that he “had an opportunity to finalise the Order but he did not act on it.”

The order sheets in the judicial file contain a note written by Mathew on 13 December, which states that he had “perused the draft” but could not finalise the order because he was “engaged in group matters of HSBC litigated for three decades and constraint of time owing to sitting in Division bench with Hon’ble President on tour to Mumbai.” He added: “Therefore, the draft may be kept in sealed cover and the file placed before the Hon’ble President for appropriate order.”

According to a senior official in the finance ministry, Panda’s draft final order was in favour of the DRI. The official claimed that Mathew was aware of this fact and was “averse” to signing and finalising such an order, adding that Panda’s note was effectively an “excuse” to delay signing the order till he had retired.

Following Panda’s retirement, it became necessary once again for a new bench to be constituted, which would have to hear the matter afresh. The reconstituted CESTAT bench had Mathew as the technical member, who continued to preside over the case, and Anil Choudhary was appointed the new judicial member. The appeal was listed for its first hearing on 8 January 2018. Five days before the hearing, PRV Ramanan, a former chief commissioner of customs and the DRI’s special counsel in the case, sought an adjournment of four weeks, citing “personal reasons.” However, the CESTAT denied his request, with the Bombay High Court’s January 2017 order provided as a justification.

The DRI’s recusal application described this refusal as a denial of a “genuine request,” and noted that the CESTAT bench displayed a “selective reliance” on the court’s six-month deadline. In this context, the DRI questioned Mathew’s decision not to finalise Panda’s draft order expeditiously, as well as his decision to grant the KISPL counsel an adjournment in August 2017, despite the fact that the same consideration of the high court’s six-month deadline was applicable at the time. The application also noted that the same bench granted adjournments in several other cases on the same day.

The bench heard the case twice—on 8 and 17 January—during the absence of the DRI’s special counsel. Mukul Rohagi, the senior advocate and former attorney general of India, appeared on behalf of the company—it was one of his first cases after resigning as the AG in June 2017. On both days, the bench allowed Rohatgi to make his submissions on behalf of the company. The DRI’s recusal application states that the CESTAT’s decisions to hear the case and schedule the second hearing during the period of the special counsel’s absence were “clearly not in accordance with the principles of natural justice.”

At this stage, the DRI filed its first application seeking Mathew’s recusal from the bench. However, the same bench (which comprised Choudhary and Mathew) deemed itself fit to consider this application for hearing, and dismissed the request. Subsequently, the DRI filed another application seeking Mathew’s recusal, which is currently pending before Justice Chandra, the CESTAT president.

The CESTAT bench heard the DRI’s special counsel’s submissions on 15 and 16 February. But the agency’s recusal application before the tribunal’s president noted that because the hearings were conducted in Ramanan’s absence, “there is no means by which the Special Counsel could know whether all facts have been stated correctly and fully.” The recusal application concluded by stating that “the treatment given to the respondent [DRI] all along except for the period between June 2017 and September 2017 has been far from being fair and impartial.” It continued, “Grave apprehensions have arisen about the basic requirements of impartiality. Considering the fact that Hon’ble Shri C. J. Mathew (Member Technical) has been a member in all the three Hon’ble benches, the Revenue justifiably apprehends that its interests could be substantially affected by the outcome of the case if Shri Mathew continues to be a judge in the matter.”

While the case against KISPL is comparatively small in terms of its revenue implications, involving an amount of approximately Rs 12 crore, its importance cannot be underscored enough. With the dismissal of the cases concerning the Adani Group’s companies under unusual circumstances, were this case to be won by KISPL in appeal against the DRI, it would set a strong judicial precedent, which in turn would act against the directorate’s investigations. The apparent manipulation of the judicial process appears to have been designed to ensure that the broader probe into the over-invoicing scandal can be buried.

The KISPL case provokes a number of vital questions. First, was the DRI aware that the original draft order by Panda was allegedly in its favour? Is this why Mathew allegedly “deliberately” avoided signing the order that Panda had prepared? Second, if indeed the course of natural justice is being perverted in the proceedings, why has the DRI not moved the Bombay High Court? Third, considering the fact that a senior advocate such as Mukul Rohatgi is appearing for KISPL, why has the DRI or finance ministry not engaged an advocate of similar stature? Finally, is the president of CESTAT aware of the course of the KISPL case, and the order passed by the bench comprising Mathew and Chaudhary regarding the DRI application that sought Matthew’s recusal? Why has the president not yet listed the DRI’s application for a hearing?

On 16 March, I emailed a questionnaire to Hasmukh Adhia, the finance secretary, which included questions concerning the contradictory orders passed by the adjudicating authority, the proceedings of the KISPL case and the precedent that it could set, and the status of the DRI’s recusal application. I received a response the following day from Shrawan Kumar, the additional director general of the DRI, in Mumbai.

Kumar did not offer any substantive comment regarding the DRI’s recusal application, and stated that the finance ministry “does not intervene in the judicial process of CESTAT.” But he confirmed that Mathews “has not yet recused himself and the matter is still pending before the same bench in CESTAT.” He also noted that the KISPL appeal before the CESTAT was “pending for final order of CESTAT.” In my email, I also asked Adhia why the DRI had not engaged a senior advocate to argue the case. Kumar responded that Ramanan had “over three decades of experience in the field of Customs laws and procedures” and added that the advocate was “known for his professional competence and honesty.”

The additional director general appeared to dismiss my concerns about the precedent that could be set by the CESTAT’s decision. He stated, “All the cases pertaining to over-invoicing of imports of coal and power equipment are distinct in terms of the modus operandi adopted.” Therefore, Kumar added, “It may not be correct to draw any assumption that the decision in the KISPL case will set a precedent.”

He was similarly non-committal in his response to my question about whether any action would be initiated against Singh for his contradictory orders. The DRI had stated in its appeal against Singh’s order, which favoured the Adani Group’s companies, that the order was “erroneous, illegal and improper not only in law but also on facts.” But Kumar adopted a different tone in his response: “The Adjudicating Authorities pass orders based on the facts and evidence presented in each case and such orders are open to appeal before the higher judicial fora,” he wrote. He added that the DRI had preferred an appeal against Singh’s order in the Adani case.

In response to the answers, a senior official in the DRI told me that it was “strange and intriguing” that Kumar had taken the position that the modus operandi adopted by different companies was “distinct,” because it was “very akin to the stand taken by the defence counsel in these cases.” The official added: “The DRI is also contradicting itself, as in the appeal filed against the orders of the Adani Group passed by KVS Singh, the DRI has used very harsh language to criticise the order and a careful reading of the notices issued by the DRI is indicative of the fact that modus-operandi is not just similar but identical. Furthermore, Shrawan Kumar has stayed silent on whether any action will be initiated against KVS Singh, especially in the light of the strong language used in the appeals against his orders.”

I also sent a detailed email to Mathew, but he responded stating that as per the Constitution, “I can speak only in the courtroom through judgements and interim orders.” He also stated that all his pronouncements “are in the public domain as are proceedings of the Court which may be attended and reported upon,” adding that “outside the court, the constituents of the Bench have no voice and have no cognition—that is the handicap of the judiciary.” A member of the CESTAT, who is known to be close to Mathew and spoke to me on the condition of anonymity, said that the constraint of the appellate tribunal’s members was “made use of by litigants to insinuate and put pressure on the bench of the tribunal.”

This person claimed that as far as members of the CESTAT bench are concerned, they become “aware of the matter before them to the extent that pleadings have been made by either side and unlike the Constitutional courts, they are precluded from considering the larger canvas.” He added, “in the case of a two-member bench of the tribunal, the orders are not of one person but the bench.” According to the person in the CESTAT, Mathew is the “junior member of the bench and judicial convention accords a relegated role to such a member in matters of procedure.” He stated that Mathew was not the “architect of all decisions” and that those seeking his recusal from the bench were not reflecting on his “integrity, ethics or competence.”

The willingness of the finance ministry to fight the case against KISPL and similar cases relating to the over-invoicing of imported coal and power equipment will be tested in the future. It is worth repeating that huge sums of public money worth Rs 50,000 crore are involved.